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How Did Ford Motor Company's Big Bet on Small Utility Vehicles Pay Off?

America's love for sport utility vehicles hasn't disappeared, it's just changed slightly. Ford has figured it out and its bet is paying off big.

In the late 1990s and early 2000s, Ford(NYSE:F) was doing well based solely on the success of its large SUVs and full-size pickups. The company's management just knew that the American consumers' appetite for the large SUV would never wane and profits would be endless. We all know how that ended, and it was extremely ugly. More than a decade later Ford -- as well as rivals General Motors(NYSE:GM) and Chrysler -- has learned a hard lesson and is producing more valuable, smaller, and fuel-efficient vehicles to regain lost market share and reputation. Because consumers are more conscious of fuel economy, yet still have a remaining love for SUVs, Ford has bet big on smaller utility vehicles, and it's paying off big time.

"This was a major bet we made with the One Ford plan, and it is paying off," said Jim Farley, executive vice president, global marketing, sales and service and Lincoln in a press release. "Utilities are helping us grow our share in the North American market -- particularly in the traditionally difficult coastal markets -- and they're driving our expansion in developing markets, where utility growth is exploding."

Ford's utility vehicles are making big gains in California, a very important coastal market, with its market share increasing more than 15% in the first quarter -- that's almost six percentage points higher than pre-recession levels in 2006. Also, consider that the Escape is on pace this year to accomplish something only the F-Series has done for Ford in nine years: surpass 300,000 annual sales.

Ford's EcoSport has been a popular vehicle internationally. Photo Credit: Ford

Global growth The small utility vehicle, like Ford's Escape, is the fastest-growing segment globally with sales up 154% between 2005 and 2012, and Ford expects to outpace industry growth over the next half decade, especially in key markets such as China.

Small utility sales surged in China to more than 1.4 million vehicles in 2012, up from roughly 120,000 in 2005, according to IHS Automotive. Ford is trying to capitalize on this enormous growth with its popular lineup of small utility vehicles, and it's strategy is doing well. Ford's goal is to double its market share to 6% in China by 2015 and the EcoSport, Edge, Explorer, and Kuga (which is the Escape here) are all helping drive market share gains, which has already increased to 4.3%.

China isn't the only region where small utility sales are thriving; it's the only segment that has grown in Europe since 2005. In a European market still struggling to rebound, Ford has increased production of its Kuga by 8% this year to meet additional demand. In addition to its success with the Kuga, Ford plans to bulk up its offering to help its turnaround efforts in Europe by releasing the Edge and globally popular EcoSport later this year.

If Lincoln's MKC can have similar success as Ford's Escape, it will be huge. Photo Credit: Ford

Luxury growth Ford not only intends to use the small utility segment to fuel its growth in emerging markets but also to help revive its all but dead luxury brand, Lincoln. It's hard to believe Lincoln was the top-selling U.S. luxury brand 15 years ago because its sales have since plummeted to embarrassing lows. Consider that the entire Lincoln brand was outsold last year by the Mustang alone and the Escape sold more than Lincoln three times over.

That looks to change sooner rather than later. In addition to this year's launch of the MKZ sedan, Ford will use the small utility sales surge to propel its MKC and therefore sales of Lincoln, back into the competitive picture. The MKC will hit the markets with a price tag just under $34,000, roughly five grand less than its German competition, the BMW X3.

Ultimately, Ford's growth looks to continue here in the U.S. and globally as the company continues to expand its market share in nearly every region due to its popular offerings, especially its small utilities. Ford's bet is paying off now, and should continue to reward investors through improving market share and revenue growth in the years ahead.

Author

As a Motley Fool Industrial Specialist, I use my marketing and business background in the automotive industry to evaluate major automakers and other large industrial corporations. Follow me on twitter for tweets about stocks, cars, sports, and anything I find amusing.
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